Friday, October 31, 2014

If history adheres to timeless long-term trends, Walter Isaacson’s recent book on the digital revolution, The Innovators,
could reveal a lot about the future of our digital age. Last week
Isaacson, known for his biographies of Steve Jobs and Albert Einstein,
spoke about the geniuses behind the last century of innovation at the New-York Historical Society, as part of the World Science Festival. Here are the biggest lessons that future innovators can learn from the recent past.

A new advance, however mechanical, will be a good partner.Ada
Lovelace predicted the partnership between humans and technology in the
1800s, when she saw mechanical looms that weaved tapestries based on
the patterns in punched cards. She predicted that machines might one day
perform various tasks based on symbols, creating everything from music
to math. Yet while others feared the replacement of human thought by
technology, Lovelace guessed that machines would remain inextricably
intertwined with their makers. More than 100 years later, Isaacson says
she was right.

A new advance will be personal.In
the 1960s, computer scientists invented many different devices to help
users interact with computers. Yet it was a mouse, similar to the ones
we use today, that took root. It’s popular because it exploits
instinctive motions, such as pulling downwards to move a visual curser
lower on the screen.

The technology will look beautiful.Isaacson
described the day that Steve Jobs unveiled a Macintosh computer, and it
displayed the words, “Hello, I’m MacIntosh,” in an attractively styled
typeface. “People gasped,” Isaacson said. While most computer engineers
had scoffed at fanciful font, considering it unnecessary, Jobs saw power
in the beauty of a graphical user interface.

It will be fun.By
the 1980s, researchers realized that inventions ranging from air
defense consoles to video games would get faster uptake when they were
fun, interactive, graphical, and responsive to the user, says Isaacson.Further,
fun is a good business plan because youth drive change. That’s why
Jennifer Lawton, the CEO of the 3D printing company MakerBot, who joined
Isaacson on stage at the event, bragged that the plastic in her
printers is non-toxic— safe enough for a child or dog to chew on. “We
have a mission to get a 3D printer into every school in America,” she
says. “We want to make sure that kids see it as a tool to solve
problems, or bring an idea to life.”

Like a good host, it will connect the right people.“The
Internet wasn’t designed to be a community-formation thing, but it
became that,” said Isaacson. The most successful platforms have been
those that facilitate interactions between geographically distant
people. The culture that’s emerged from the digital revolution isn’t
just a do-it-yourself culture, Isaacson said, but a do-it-ourselves
culture....

Thus far in today's session the DJIA's 17,395.54 top-tick is a new all-time high while the S&P's high print of 2,017.45 falls a bit short of the 2019.26 record.The interesting thing to note about today's action is the lack of euphoria.Where's the market going? Higher.

How high? Don't know.We've been fortunate just to get the direction right.

...'Fake Alpha'
It's
easy for an unscrupulous hedge fund manager to make himself look better
than he is, as Foster and Young demonstrate in their paper. "We show,
in particular, that managers can mimic exceptional performance records
with high probability (and thereby earn large fees) without delivering
exceptional performance."

An
investment pool's returns come in two parts: beta, which is merely
riding the coattails of a rising market, and alpha, the extra return
produced by smart investment choices. Because hedge funds use leverage,
or borrowed money, and invest in derivatives, it is fairly easy to
produce "fake alpha," the researchers say.

In
their hypothetical example, a fund manager named Oz sets up a $100
million hedge fund with the goal of earning 10 percentage points a year
above the 4% annual yield of one-year government bonds. The fund will
run for five years and charge a management fee of 2% of assets and an
incentive fee of 20% of any profits that exceed the bond yield.

Oz
creates and sells a series of "covered calls" and sells them for $11
million. Each call is a stock option that will pay the investor who
bought it $1 million if the stock market rises by a given percentage.
Using historical information, Oz figures there is only a 10% probability
the market will rise that much. If it does, the hedge fund will be
virtually wiped out by being forced to pay $111 million to the call
owners. If it does not, the fund will pay nothing -- and the $11 million
received from the call buyers will be profit.

Oz
now has $100 million received from his investors, plus $11 million from
the options sales. He invests the $111 million in risk-free U.S.
Treasury bills earning 4%. After a year, the fund thus grows to $115.5
million. To his investors, this is a 15.5% return on their original $100
million.
Oz earns his 2% management
fee on the $115.5 million, plus 20% of the return exceeding what came
from the 4% Treasury yield -- or 20% of $11.5 million.

There's
a 59% chance this process can continue for five years without a market
downturn annihilating the fund, allowing Oz to collect $19 million in
fees as compounding makes the fund grow larger and larger. If the market
does crash, Oz can close the fund, leaving the investors with
devastating losses but keeping the fees he's been paid to that point.

This
simplified "piggy-back strategy" involves no borrowing, or leverage. A
real-world manager could inflate his incentive fee by borrowing money to
increase the size of his bets, though that would deepen the investors'
losses if things went wrong.

The
bottom line is that Oz's investors, who don't know what he is doing,
may well believe his market-beating results come from brilliant stock
picking or other wizardry. In fact, anyone could set up this simple
strategy. Moreover, the investors are in the dark about the risks they
are taking. They might well assume that if they make in excess of 15%
one year, they might lose 15% in another. In fact, there's a 10% chance
they will lose more than 95% of the money they put in.>>>MORE

The 2013 double bottoms at $1179 and $1181, recently (early Oct.) tested at $1183, have given way and now become overhead resistance. December futures $1165.30 down $33.30 last trade.
Silver has broken $16 at $15.89 down 53 cents.

Gold prices are sharply lower, hit a four-year low and fell below
major long-term technical support that was located at the $1,180.00
area in early U.S. trading Friday.
The precious metals are still feeling the bearish
effects of a strong rally in the U.S. dollar index. The big rally in
world stock markets late this week is also a negative that is pulling
away funds from the precious metals markets. December Comex gold was
last down $25.60 at $1,173.10 an ounce. Spot gold was last quoted down
$26.00 at $1,173.40. December Comex silver last traded down $0.345 at
$16.07 an ounce.

There’s a lot going on in the world market
place Friday, on this last trading day of the week and of the month.
There are three features at work Friday morning: U.S. stock indexes hit
fresh record or multi-year highs overnight, the U.S. dollar index is
surging, and gold prices have slumped to a four-year low. All have
occurred in the wake of Wednesday afternoon’s FOMC statement that was
deemed surprisingly hawkish on U.S. monetary policy.

The world equity markets and the greenback got
an added boost overnight when the Bank of Japan surprisingly announced
further and somewhat aggressive monetary policy easing measures. The
BOJ move is an attempt to ward off deflationary pressures that have
wracked Japan’s economy for at least the past 15 years. The Japanese yen
sunk on the news, but Japan’s Nikkei stock index rallied on the BOJ
easing. Other Asian and European stock markets also rallied Friday....MORE

Just think of all those shares shaken loose and dumped on the way down and at the bottom. It's almost enough to make one believe in conspiracy theories.

We did our best to stand against the storm, warning this decline was coming, catching the bottom and then calling the upmove. To no avail, the herd does what the herd always does.
This morning's premarket trade is up $2.05 at $201.47.

ok we are not sure of the data feed that we received at the time of
writing :) , but anyway looks like $SPY posted 11 consecutive higher
lows’s which triggers below trading strategies1) $SPY posts 10 or more consecutive higher low’s in row
below the trading odds , for $SPY longs , for the next 1/2/3/4/5 trading days , data since Feb 1993 , minus today’s instance

Date

$SPY

t+1 %

t+2%

t+3%

t+4%

t+5%

1st +’ve %

29-Oct-14

198.11

??

??

??

??

??

??

20-May-13

162.09

0.15

-0.6

-0.88

-0.97

-0.38

0.15

17-May-13

162.1

-0.01

0.14

-0.6

-0.89

-0.97

0.14

16-May-13

160.55

0.97

0.96

1.11

0.36

0.07

0.97

15-May-13

161.31

-0.47

0.49

0.48

0.63

-0.12

0.49

15-Mar-13

151.32

-0.56

-0.79

-0.09

-0.95

-0.15

-0.15

30-Jan-13

145.08

-0.25

0.78

-0.36

0.65

0.72

0.78

27-Jul-09

88.45

-0.46

-0.71

0.33

0.46

2.13

0.33

24-Jul-09

88.19

0.29

-0.17

-0.42

0.62

0.76

0.29

15-Nov-04

97.07

-0.72

-0.13

0.01

-1.1

-0.64

0.01

12-Nov-04

96.83

0.25

-0.48

0.11

0.26

-0.86

0.25

11-Nov-04

96.07

0.79

1.04

0.31

0.91

1.05

0.79

10-Nov-04

95.35

0.76

1.55

1.8

1.07

1.67

0.76

9-Nov-04

95.27

0.08

0.84

1.64

1.89

1.15

0.08

8-Nov-04

95.46

-0.2

-0.12

0.64

1.44

1.69

0.64

30-Dec-03

89.61

0.09

0.04

1.13

1.23

1.57

0.09

29-Dec-03

89.59

0.02

0.11

0.07

1.15

1.25

0.02

26-Dec-03

88.42

1.32

1.35

1.44

1.39

2.49

1.32

24-Dec-03

88.35

0.08

1.4

1.43

1.52

1.47

0.08

8-Mar-02

91.33

0.22

0.15

-0.81

-0.95

0

0.22

29-Nov-96

55.5

0.04

-1.68

-1.41

-1.68

-2.25

0.04

27-Nov-96

55.29

0.38

0.42

-1.3

-1.03

-1.3

0.38

23-Jun-95

39.12

-1.2

-1.38

-0.87

-1.05

-1.1

-1.1

avg

0.07

0.15

0.17

0.23

0.38

0.30

med

0.08

0.13

0.09

0.54

0.40

0.24

vs all days since 1993

0.04

0.08

0.12

0.16

0.2

0.16

%wins

64

59

59

64

55

91

ps: t+1 to t+5 are the percentage changes , and the 1st +’veis
when the entry is set to current close and exit at the first higher
close than the entry , with-in the next five trading days , else with a
loss at the end of the fifth trading day....MORE"point is 13/13 times , $SPY posted a higher close than the current close over the next 5 trading days , at some point of time"

What should news outlets do when it becomes clear they’ve treated scams as legitimate stories?

On September 15, 2011, executives of Arevenca, an Aruba-based oil company, and Avic Xac, a Chinese state aircraft company, signed the biggest oil deal in history in Madrid. The agreement promised $200 billion a year in trade over 10 years at a total value of $2 trillion. Francisco Javier González, the president of Arevenca, spoke at the signing about plans to supply not only fuel but also ports and railways.

Within hours, the news was out. Scores of news websites around the world carried a wire story from EFE, Spain’s biggest news agency. Viewers could also see a Spanish-language video news report on EFE’s own page or on its YouTube channel; an extended English-language version promptly appeared on González’ YouTube channel.

EFE had been played. Arevenca was little more than a website full of lies and an office in Aruba. The money involved, $200 billion, was comparable to the annual revenue of global corporations like Chevron. Avic Xac has nothing to do with ports. There was barely anyone at the signing ceremony—no ambassadors, no bankers, and, notably, no oil reporters. Despite enough red flags to stock a Communist Party parade, EFE ran its story, both in print and video. Commenters on YouTube quickly said the event was a fraud, but the video is still there. (The article and video have been removed from EFE’s website.)

The screwup would have been long since forgotten, like an unfunny “Yes Men” prank, except that González is a prolific con man. He and his front men have consistently referred back to the EFE coverage as proof of the company’s seriousness as it convinces victims to wire advance payments for oil products which then never arrive—the type of fraud often referred to as a Nigeria scam. A civil court in Puerto Rico judged González liable for stealing $7.8 million from an asphalt company there, and he is now facing criminal complaints in Spain.....MORE

Thursday, October 30, 2014

There are things at which the Securities and Exchange Commission
should probably have a look. Like, say, the unregistered issuance of
securities by companies dealing in fake currencies. You know, just a
gander, if for no other reason than to demonstrate that they’re expected
to follow all of those boring, stupid rules they hate so much. And so they have! Or perhaps not.

Co-founder Evan Wagner said Counterparty had not received
any letter from the SEC and that he and his colleagues were unaware of
any being received by other firms using its software. Either way, he
said, Counterparty is not responsible for the actions of these
third-party firms….
BitBeat received similarly confident assurances from other prominent
Bitcoin 2.0 companies, which seek to facilitate decentralized,
middleman-free commercial enterprises.

The Fed’s balance sheet is no longer in expansion mode,
which means it’s time for post-mortems of the most recent asset
purchase programme. (Our colleague John Authers has a very good round-up
of what did and didn’t happen since QE3 began.)

We want to focus on the fact that the most recent round of
bond-buying seemed to have no inflationary impact. If anything, an
observer of the data who had no preconceptions about monetary policy
operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).

Let’s start by looking at the changes in actual inflation since the start of 2010.

Inflation was slowing dramatically in the period before QE2. Between January, 2010 and Bernanke’s teaser speech
at Jackson Hole at the end of August, annual inflation measured by
changes in the consumer price index had slowed by 1.4 percentage points,
while the annual growth rate of the personal consumption expenditure
deflator had decelerated by about 0.8 percentage points. Even price
indices that excluded food and energy were slowing sharply.

Inflation continued to slow down until asset purchases began in November, 2010:

No matter how you measure it, inflation quickly accelerated. The next
chart shows how things stood as QE2 was coming to a close in June,
2011:

In fact, the acceleration in inflation since the start of QE2 more
than outweighed the initial slowdown in inflation that prompted the Fed
to consider the programme in the first place. (We aren’t implying any
causal connection, merely noting certain coincidences in timing.)

Moreover, inflation continued to accelerate in the months after QE2
ended but before Operation Twist and reinvestment of maturing agency MBS
began at the end of September.
Headline CPI and PCE inflation both peaked in September, 2011. The
annual rate of core CPI inflation continued to accelerate until April,
2012, while the rate of core PCE inflation was speeding up until March,
2012.

Thanks to welcome declines in commodity prices due to the combination
of increased supply and reduced demand in the rest of the world,
headline rates of inflation sharply decelerated after September, 2011.
Core inflation slowed down as the spring of 2012 turned into summer,
although the pace of core inflation was still significantly faster than
when QE2 ended....MUCH MORE

Magic?
None of the above?
The inflation talk was a red herring dragged across the path of wealth transfer?

Stockton to Slash Payments to Bondholders and Raise Taxes While Not Cutting City Pensions

The federal judge overseeing the bankruptcy of Stockton, Calif.,
ruled Thursday the city can exit court protection after slashing
payments to bondholders and raising taxes in order to avoid cutting the
city’s pensions.

U.S. Bankruptcy Judge
Christopher Klein
called the city’s reorganization plan “the best that can be done” during a hearing in Sacramento.

Judge
Klein approved the city’s reorganization plan over protests from two
Franklin Templeton Investments-managed funds, which underwrote the bonds
for Stockton’s fire stations and parks. The funds argued that the city
could afford to repay more than its $4 million offer.

“We are disappointed,” said Franklin Templeton lawyer James Johnston after the ruling.

The
restructuring didn’t call for cutting pension obligations to California
Public Employees’ Retirement System, despite critics saying the city
would still struggle to afford the state-mandated payments....MORE

And the Los Angeles Times' take on things:

Judge approves Stockton bankruptcy plan; worker pensions safe

A federal bankruptcy judge approved the city of Stockton’s bankruptcy
recovery plan, allowing the city to continue with planned pension
payments to retired workers.

The case was being closely watched
after the judge ruled earlier this month that the city’s payments to the
California Public Employees’ Retirement System could be cut in
bankruptcy just like any other obligation.

If Judge Christopher M. Klein had rejected Stockton’s plan and forced
the city to slash its payments to CalPERS, it could have opened the
door for other cities struggling with escalating pension costs to follow
suit.

Stockton officials had argued that they couldn’t afford to
cut pensions or to create another retirement plan for its employees.
They said employees would leave Stockton for other cities offering
retirement benefits through CalPERS....MORE

We are still betting on $875 before the decline is done but, as we were saying before the recent action in the equity markets, silver is the easier call.* CME Dec. gold now $1198.30, silver $16.41.
From ZeroHedge(!):

It appears the machines forgot the shift in DST across the pond and
started their European close flush a little early. Someone/something
decided it was an opportune time to dump thousands of contracts of gold and silver futures this morning - clearly ignoring Alan Greenspan's advice. Gold ETF holdings are now back at levels first seen in April 2009.
Gold's break below $1,200 likely brought some momentum chasers but
Silver is in freefall, down over 5% and back to Feb 2010 lows. WTI Crude also broke below the crucial $81 level...

Major financial crises seem to rear
their ugly head about every decade or so somewhere in the world, each
different from the preceding one.

While there has been a lot of research
on the causes of the latest global financial crisis that began in 2008 —
and how to prevent it happening again — many experts argue that any new
crisis will be different. Like the old saw noting that “generals always
fight the last war,” there have been questions raised about whether or
not researchers have focused enough on what might cause a future
financial crisis, particularly with regard to central bank behavior.

In an effort to avoid planning for the past when it comes to global financial crises, Wharton finance professor Franklin Allen has collaborated on a research paper titled “Financial Connections and Systemic Risk” with colleagues Ana Babus of the University of Cambridge and Elena Carletti of the European University Institute.

Allen spoke with Knowledge@Wharton
about his paper and what regulators need to be concerned about in order
to avoid future crises.

An edited transcript of the conversation follows.

On what the research is about:

The research I’m going to talk about is
part of a long agenda. It has to do with the way that central banks and
governments intervene in the economy.

For the last 20 or 30 years, central
banks have, by and large, focused on fighting inflation. After we had
the big shocks in the 1970s, that was the major problem, and that’s what
they’ve spent their main efforts doing. Some of the central banks, like
the Federal Reserve, have a dual mandate. In addition to worrying about
inflation, they also have to worry about unemployment.

The way that this has been implemented in
most countries, either explicitly or implicitly, is that the central
bank has focused on inflation, and it’s usually granted formal
independence from the government. The idea there is to stop it from
lowering interest rates just before an election and making the economy
boom, but then having inflation going up and so on. That was an idea
that has been widely accepted for some time.

Financial stability was in the mix, but
it was usually regarded as something that was secondary — so that was
dealt with either by the central bank or in many countries, such as the
U.K. or Japan, by a separate financial services authority or FSA. They
would deal with problems to make sure that there were no difficulties in
transmitting monetary policy because banks were having problems. The
way they did that was to stop banks taking risks, one by one. They would
look at each bank and make sure that they weren’t doing risky things.
The idea was that would stop any problems in the financial system.

Fiscal policy was done separately by the
treasury or the finance ministry, depending on the country. We could
break up all these different parts of the way the government and central
banks intervened, and they could all do their job separately. Now the
problem is — what the crisis has shown — is that system didn’t work
properly. What we need to do, I argue in this research, is to think
carefully about how we should proceed going forward....MUCH MORE

As to an eventual bottom our models, apparently backdooring Goldman's, guess at $70. Did I say guess?
From Reuters:

Fund manager Andurand says US oil could fall to $50/bbl

Pierre Andurand, one of the most
respected and successful fund managers in the oil industry, said
he believed U.S. light crude oil could fall as low as $50
per barrel.

The U.S. benchmark oil price, also known as WTI, "will be
volatile, but assuming no more supply disruptions, I think we
can overshoot down to $50 a barrel," Andurand told Reuters on
the sidelines of the Oil & Money conference on Wednesday.

"The move will mainly be in the front of the curve, but not
just the first three months - the first six months or so," he
said, adding that Brent would come down as well.

Andurand was co-founder of hedge fund BlueGold, which racked
up record returns during the steep rise in oil prices in 2008
and the subsequent collapse in 2008-2009.

Bluegold's returns were lower in 2010, and the fund posted a
loss the following year. Its co-founders eventually went their
separate ways, and Andurand now runs a smaller hedge fund under
his own name, which returned more than 25 percent last year and
is up marginally year-to-date in 2014.

Andurand told the Oil and Money conference that he thought
it unlikely that OPEC would cut production, even though current
supply and demand trends suggested the market could be in a 2
million barrel-per-day surplus next year....MORE

The Fed’s move, while expected, was paired with a more upbeat
assessment of the U.S. labor market. Those factor at once damp gold’s
appeal versus income-generating assets, as a hedge against inflation and
as a haven from economic uncertainty....

This cute, abandoned town in Connecticut is basically Stars Hollow from Gilmore Girls, and it's currently being sold off at auction with a starting bid of $800,000. That's less than a brownstone in Brooklyn. That's less than some studio apartments
here. It's a whole goddamn town! That's 62-acres, plus plenty of homes
and General Store type structures that may or may not be haunted by
cool, historic ghosts. Here's the deal:

"Why are they selling an entire town? Well, for starters,
it’s been vacant for more than 20 years and through its history, has
been abandoned not once, not twice, but three times
Dating back to the 1830s, Johnsonville was once a thriving mill town
and popular recreation spot set along the Moodus River, with amenities
including a restaurant called the Red House Restaurant, a general store
and a one-room schoolhouse.

Victorian and colonial-style houses with fireplaces and pillared
porches were built by the families of the mill-owners where they lived
contently up until the 1950s. All the historic buildings still remain.
But then modernization crept up on the quaint community, work dried up
and Johnsonville became a ghost town for the first time."

And probably more racist.
Depending on the source, San Francisco's population is between 6.0 and 6.6% black vs. 14.2% for the country as a whole. S.F. city and county use zoning laws to keep black folks out.
The same goes for Seattle and Portland. Someone should do a story on it....

And moved on about my business.
Well, there must be something in the air regarding the reality of big cities and a bit of honesty among journos writing about the current zeitgeist. There are some realities that should probably be faced.

But San Francisco's problem is bigger than San Francisco. Across the
country, rich, dense cities are struggling with affordable housing, to
the considerable anguish of their middle class families.

Among the 100 largest U.S. metros, 63 percent of homes are "within reach" for a middle-class family, according to Trulia.
But among the 20 richest U.S. metros, just 47 percent of homes are
affordable, including a national low of 14 percent in San Francisco. The
firm defined "within reach" as a for-sale home with a total monthly payment (including mortgage and taxes) less than 31 percent of the metro's median household income.

If you line up the country's 100 richest metros from 1 to 100,
household affordability falls as household income rises, even after you
consider that middle class families in richer cities have more income. [The graph below considers only the 25 richest US metros to keep city names moderately legible within the computer screen.]

The line isn't smooth—and there are exceptions—but the relationship is clear: In general, richer cities have less affordable housing.

But there's a second reason why San Francisco's problem is emblematic of a national story. Liberal cities seem to have the worst affordability crises, according to Trulia chief economist Jed Kolko.

In a recent article,
Kolko divided the largest cities into 32 “red" metros where Romney got
more votes than Obama in 2012 (e.g. Houston), 40 “light-blue” markets
where Obama won by fewer than 20 points (e.g. Austin), and 28
“dark-blue” metros where Obama won by more than 20 points (e.g. L.A.,
SF, NYC). Although all three housing groups faced similar declines in
the recession and similar bounce-backs in the recovery, affordability
remains a bigger problem in the bluest cities....MORE

Finally, and probably of most interest to our readers, this morning's FT Alphaville post:

When city-dwellers moan about their high cost of living, they often
elicit the unsympathetic retort that they should shut up and praise the
ghost of Jane Jacobs for the cultural vibrancy of their neighborhoods,
the lucrative jobs, and the artisanal pizza.

Living in a great city is a consumption good, you whinging
ninnies — you SHOULD have to pay for it! Why do you think you’re
entitled to live wherever you want?

Hey, fair enough.

But there’s a difference between grumblings about $5 cinnamon
macchiatos and the more useful outrage about meaningful troubles that
can be solved — a difference between #firstworldproblems and the healthier expression of annoyed patriotism towards one’s habitat.

I like living here and want to keep living here, which is why the
problems I complain about aren’t enough to push me out. I’d rather
stick around and see the problems solved. But those problems suck, so
let’s start doing something about them.
To complain that rents, for instance, could and should be lower isn’t
always a sign of yuppie entitlement. Nor is it mutually exclusive with
appreciating the wonderful aspects of city life. Sometimes the gripe
really is legitimate.*

A doorstopping thud of a McKinsey report dropped last week, canvassing the issue of insufficient affordable housing in cities throughout the world.

The biggest contributing problem is idle land, which can be freed for
development with fairly straightforward, but always politically
intractable, ideas. Amend anti-density zoning regulations. Loosen
bureaucratic restrictions on new construction. Allow more building on
government-owned land, or privatise it. Eliminate rent controls where
possible.

The report included a useful, brief case study of New York City that
makes plain the effects of insufficient affordable housing on its
workers, a problem shared by so many of the world’s biggest cities.
A few excerpts follow, and we’ve bolded the highlights if you want to race through it:

We estimate that half of New York households cannot afford basic housing using 30 percent of their income.
In New York City, median household income is $51,000. If we define
low-income households as those earning 80 percent of the median, 1.2
million households (of about 3.1 million) would be classified low-
income. …

We estimate that the affordability gap is about $18 billion per year (Exhibit 79). This represents about 4 percent of New York City’s GDP.

This ties well with current statistics, about 1.6 million households
in New York City face housing challenges across different housing
categories (Exhibit 80). About 55 percent of renters and 50
percent of households with mortgages are financially stretched, paying
more than 30 percent of income on housing costs.

Housing issues affect low-income households disproportionately:
89 percent of households earning less than 30 percent of area median
income are financially stretched by housing costs. Of households earning
30 to 50 percent of area median income, 83 percent are financially
stretched by housing costs, and 66 percent of households earning 50 to
80 percent of area median income pay more than 30 percent of income for
housing....

Wall St Journal, Oct. 23, 2014 (emphasis added): One major volcanic eruption could make Japan “extinct,” a study by experts at Kobe University warns… “We should be aware… It wouldn’t be a surprise if such gigantic eruption were to take place at any moment.”

Japan Times, Oct. 24, 2014: Colossal volcanic eruption could destroy Japan at any time: study — Japan could be nearly destroyed by a volcanic eruption over the next century that would put nearly all of its population of 127 million people at risk… “It is not an overstatement to say that a colossal volcanic eruption would leave Japan extinct as a country,”
Kobe University earth sciences professor Yoshiyuki Tatsumi and
associate professor Keiko Suzuki said… A disaster on Kyushu… would see an area with 7 million people buried by flows of lava and molten rock in just two hours [and] making nearly the entire country “unlivable”… It would be “hopeless” trying to save about 120 million…

The Federal Reserve on Wednesday announced the end of its long-running bond-buying program.
The central bank also stuck to an assurance that short-term interest
rates would remain near zero for a “considerable time.” Economists
largely expected the end of the Fed’s third round of quantitative
easing, as it was known. But many found the statement more “hawkish,” easing off concerns about progress in the labor market.

Here’s what some economists are saying:

“In short, [the Fed's statement was] largely as expected, but, if anything, a more positive tone, at least on the labor market.
We expect tightening will start by June 2015, but, of course, that will
depend on the data. For now, there is no urgency for officials to use
the statement to signal an imminent move. Bond yields have risen a few
basis points since the statement was released.” –Jim O’Sullivan, High Frequency Economics

“As expected, the Fed today announced an end its third round of large-scale asset purchases (aka QE3). Slightly
less expected, however, is that despite the recent market volatility,
the statement issued after the FOMC meeting was, if anything, more
hawkish…On balance, the Fed believes it is getting closer to
meeting the full employment side of its mandate, while it is not
necessarily convinced it is losing ground in meeting the price stability
side of its mandate. We would say that was, if anything, a slightly
hawkish shift. It’s also perhaps telling that it was the dovish Narayana
Kocherlakota who dissented at this vote, whereas in previous FOMC
meetings this year it is the hawks who dissented.” –Paul Ashworth, Capital Economics

“After getting knocked off its mark by recent equity market
volatility, the FOMC has apparently returned to form, namely a slow but
steady shift towards a more hawkish trajectory on policy. What
better way, in fact, to get the equity market to rally in the face of
eventually higher interest rates than to be more bullish on growth and
shifting the focus of potential action from labor to now waiting for
inflation. The FOMC also dropped any mention of fiscal policy being a
drag on growth. Barring any unforeseen slowdowns, which the Fed never
sees, we are now simply left to wait around for signals core inflation
is on its way back towards 2%. Once signaled, the Fed is ready to
shorten ‘considerable time’ to no time at all.” –Steve Blitz, ITG Investment Research

That is Barron's magazine's headline, not ours.
We see commodities as tactical trading vehicles, not investments and see the larger macro picture as being shaped by a disinflationary-to-deflationary bias.
On the other hand Barron's has been around longer than I so they may be right with the six "Buy Oil" articles they've run in the last week.
But I'm doubting it.
From Barron's 'Wall Street's Best Minds' feature:

Wells Fargo urges investors to use price pullbacks to invest in energy, metals, and agriculture.

Looking
into the end of the year and into 2015, we feel investors should use
the recent price pullbacks to take commodity allocations towards their
long-term target allocations. We recommend an allocation split evenly
between a broadly diversified position and another in energy (crude oil,
refined products, and natural gas).

For the past two months, investor
anticipation of new and large monetary policy stimulus in Europe and
Japan has rallied the U.S. dollar and raised the cost of raw materials
in local currencies. In addition, worries about excess commodity
supplies accompany slipping global economic data.

We
think the impact of these factors is overdone. During the coming weeks,
expectations for dollar strength should moderate. The excess supply
problem also seems to be resolving, especially in base metals, where
miners are cutting production quickly and global markets are gradually
rebalancing.

The crude oil market is
particularly concerned about excess oil supply and the strong U.S.
dollar. After touching $115/barrel in June, the price of benchmark
European Brent crude oil fell by $35/barrel by early October, finishing
below $100 for the first time since political turmoil erupted in Egypt
in 2011. The decline seems unjustified based on our supply and demand
outlook, and we advise investors to be careful about assuming $80/barrel
oil prices are here to stay. For example, the last $12 of oil price
declines came as the dollar also declined this month.

It
is also risky to assume that OPEC and U.S. supply will become permanent
sources of excess supply. Extra U.S. production does not add much to
new excess supply. If OPEC would only cut by 500,000 barrels per day
(1.5% of their daily output), it could effectively erase the
contribution of this year’s gain in U.S. production. So why doesn’t OPEC
cut? For perspective, oil prices are still in their four-year trading
range of $80-$120 per barrel, and the collapse from $90 came quickly –
possibly too quickly for OPEC’s factious members to form a consensus.
Since the mid-1980s, OPEC has tried to steady oil prices, and potential
price spikes are material risks – for example: if the Libyan production
recovery falters and ISIS threatens large production facilities.

Our monthly review of the major commodity sectors follows next:

Energy:
Energy prices continue to drag on concerns of excess crude oil supply
and weak seasonal demand. However, seasonal petroleum and natural gas
demand is poised to pick up, and consumption is still growing globally
-- especially from strong Chinese automobile sales -- and should
accelerate with improved global economic growth next year. We revised
lower our 2014 year-end target for West Texas Intermediate crude oil to
$90-$95 per barrel to account for temporary uncertainty and expect a
rebound into year-end, followed by single-digit 2015 returns.

Base metals:
Base metals prices have fallen with the rising U.S. dollar, and
weakening global manufacturing demand and falling real estate prices in
China have sapped the construction consumption of industrial metals.
However, 2015 global demand prospects look better, and miners are
slashing output faster than we previously thought they would.

Precious metals:
Demand for platinum and palladium for catalytic converters has
supported these markets somewhat, but no supply-demand rebalance is
likely for gold and silver, which remain vulnerable to potentially
higher U.S. interest rates sooner rather than later. Investors should
use any gold or silver price rebound to reallocate into a diversified
commodity position.

Grains:
The wet weather in the U.S. Midwest has slowed the harvest and boosted
the soil conditions for wheat planting. As a further negative for price,
robust foreign demand for corn and soybeans may fail to counteract
excess supply and the strong dollar and put U.S. farmers at a
competitive disadvantage....MORE

Oddly enough (or maybe not that odd) the disinflationary backdrop is actually a positive for the overall market whose best real returns usually occur in a 0-2% inflation regime.

Farmland
Partners revealed a share buyback only three months after raising
$46.5m from shareholders, saying the turnaround reflected the
unwarranted cheapness of the stock.

The
land investment group revealed a $10m stock repurchase programme, to be
executed "from time to time, in amounts and prices as the company deems
appropriate".

The
buyback "demonstrates our confidence in our ability to generate returns
that are not reflected by our current stock price", said Paul Pittman,
the group's founder and chief executive.

"Repurchasing
our shares is a prudent use of our cash and a significant value
creation opportunity for the company's stockholders."

Farmland Partners in July sold 3.71m shares at $12.50 a share to raise cash for a land acquisition warchest.

The
shares closed last night at $10.36, representing a drop of 17% on the
July sale price, although they rose 3.3% on Wednesday to $10.70 in
lunchtime deals in New York.

Soaring costs

The
announcement came hours after Farmland Partners unveiled for the
July-to-September period, its first full quarter since listing in April,
earnings of $34,805, down from $169,418 a year before.

While
revenues more than doubled to $1.19m, a reflection of a spending spree
which is on track to lift its portfolio above 38,000 acres, costs soared
too, with general and administrative expenses rocketing above $645,000
from $7,873 a year before, a reflecting of its listing and more active operation....MORE

I can think of a few things dumber but let's roll with Jim on this.
From the CFA Institute:

Shareholder Value Maximization: The World’s Dumbest Idea?

If you agree with the economist John Maynard Keynes that “ideas shape
the course of history,” then you ought to agree that the history of
modern business and finance has been shaped by one influential idea:
that the job of a company’s management is to maximize shareholder value.
But according to James Montier,
a distinguished investment professional and behavioural finance writer,
shareholder value maximization is “a bad idea.” He believes it has not
added any value for shareholders and has contributed to such major
economic and social problems as short-termism and rising inequality.

Montier made his case against shareholder value maximization when delivering the closing keynote address at the 2014 European Investment Conference
in London, a video of which can be viewed below. In his characteristic
iconoclastic style with a generous use of ironic humour, Montier labeled
shareholder value maximization, the way Jack Welch, the former CEO of
GE, had once described it in 2009, as “the dumbest idea in the world.”

An Academic Opinion without Much Evidence
Montier said that the idea of shareholder value maximization didn’t
come from businesses but rather originated as an opinion in academia and
was unsupported by much evidence. It is most directly traced to an op-ed written by economist Milton Friedman in 1970. Over the years, academic research papers on the subject, such as those by Michael C. Jensen and William H. Meckling (PDF) and Jensen and Kevin J. Murphy (PDF),
have made it inseparable from the alignment of incentives. That is, top
management of companies should be offered financial incentives (e.g.,
stock ownership and call options) to align their interest with
maximizing the stock price.

The idea of shareholder value and incentives then worked its way into practice. Montier gave the example of Business Roundtable
(BRT), an association of CEOs of major US companies. He said that in
1981, the mission of BRT referred to making quality goods and services,
earning a profit, and building the economy, but by 1997, it became
firmly focused on shareholder value.

Failing Shareholders
Montier claimed that shareholder value maximization has failed the
shareholders — its intended beneficiaries. Despite enormous increases in
compensation of CEOs and a rising proportion of financial incentives
through stock ownership and options, shareholders are not better off. To
illustrate this point with a case example, Montier compared the return
performance of IBM, which switched its focus to shareholder value
maximization, to that of Johnson & Johnson, which retained its credo (PDF)
emphasizing responsibility to customers, employees, and communities.
Montier showed that during 1971–2013, the stock of Johnson & Johnson
had indeed outperformed that of IBM....MORE

Bloomberg
reports that it appears that Kim Jong Un is seeking to erase the
remaining influence of his dead uncle by executing about 10 senior
Workers’ Party officials on charges from graft to watching South Korean
soap operas. The reports come from an aide to a South Korean lawmaker.
The deaths, which occurred by firing squad, are likely part of Kim’s
latest round of purges said Lim Dae Sung, an aide to ruling South Korean
Saenuri Party lawmaker Lee Cheol Woo, who attended a briefing at the
National Intelligence Service yesterday in Seoul. Kim had his uncle,
Jang Song Thaek, killed in December last year....MORE

“Kim Jong-un is trying to establish
absolute power and strengthen his regime with public punishments.
However, frequent purges can create side effects.”

Children, do not try this at home. I'm not kidding.
By the time you are calling opposite moves in monetary commodities (what, you've never heard of the BTU standard?) you are probably beyond hope and riding the fast train to loony land:

Oct. 16-"(just kidding, a gold short at $1240 sounds lovely)
" Oct. 27-"...WTI is now only down 26 cents from today's settle, at $80.74. We're
going lower but you may see a bit of a short squeeze this week."

Oil titan Harold Hamm told CNBC on Tuesday: Don't believe the hype. "There's not a glut in the market at all."

The billionaire founder of Continental Resources
took issue with the reason mostly given for crude's slide to multi-year
lows, and said he's not cutting production yet. But even if he did, he
said, "You don't cap producing wells. What you do is cut back on new
drilling."

"What we see here is people projecting next year that we might see [oversupply]," he said in a "Squawk Box" interview. "It would have to be a perfect world to see that. I, frankly, don't believe that's going to happen."

He disputed contentions from Goldman Sachs, which on Sunday predicted oil at $70 a barrel in the U.S. in the second quarter because of oversupply. West Texas Intermediate (WTI) crude was trading $81 in early trading Tuesday after dropping below $80 Monday for the first time since early summer of 2012....MORE

Mr. Hamm is one of the 50 wealthiest people on the planet which is a good thing as, possibly as early as today, he is about to lose between $7 and $9 billion dollars in the most expensive divorce in U.S. history.
Of course if he loses it it means that the loot wasn't really his to lose, that the wealth is a marital asset and... jeez, I see no upside to my prattling on about divorce law.

The 1929 crash that ushered in the Great Depression included Black
Monday and Black Tuesday, during which the Dow Jones Industrial Average
fell 13% and 12% back-to-back. Investors after Monday’s slide were
assured that “banking interests” were supporting the market, “with a
hand on the throttle.” Today in WSJ History....

No kidding. Second only to the fact that the insurers have probably screwed up the longevity numbers à la the British,* is the fear they won't earn enough to meet the obligations they have incurred.
From MoneyBeat;

A dozen German life insurance companies wouldn’t be sufficiently funded
to face even a mild stress scenario in which German government bond
yields decline further and stay super low, according to a paper released
Monday by Germany’s central bank.

“The present analysis shows that a persistent low-interest-rate
environment harbors a potential risk to the stability of the life
insurance segment,” a pair of Bundesbank economists wrote in a study looking at year-end 2012 data from 85 German life insurers.

The study included what the authors called a “mild stress scenario”
in which German Bund yields stayed at levels that have persisted in
Japan “for an extended period.” Twelve of the 85 German life insurers
wouldn’t be able to meet their own funding requirements by 2023 under
this scenario, the authors found. The study didn’t identify individual
companies....MORE

Tuesday, October 28, 2014

Dennis Gartman is not our favorite prognosticator. I've said in the past that Gartman will lose you money in equities* ("Warren Buffett is an idiot")
but in commodities, especially ags, but also commodities in general, he
exhibits what computer modelers call forecast skill and can generate
excess returns.

From Barron's Read This Spike That column:

Twelve days ago, as the broader U.S. stock
market was in the midst of its first sharp decline in years, popular
newsletter editor Dennis Gartman appeared on a CNBC show and advised
viewers to prepare for a bear market.

“You stay in cash and you stay in short-term bonds and you don’t move out,” Gartman advised viewers before adding “this is the start of a bear market, and it could last for several more months I’m afraid.”

But
stocks quickly turned around and began to move toward the heights last
seen in September. A chastened Gartman admitted late last week on
another CNBC show that his bear-market call was all wrong. However, he’s
still not willing to go long, instead maintaining a “neutral” position
on the market as a whole, according to a CNBC.com report on Gartman’s
rapid change of heart.

Asked by CNBC
what he missed about the current character of the market, he replied
“I’m not sure what I missed. I really don’t know….This is the type of
volatility that is absolutely beyond my ken. I’ve only been at this for
40-some years, so I’m relatively new to it. But quite honestly, I’ve
never seen anything like the last two weeks.”

While
the volatility may have been beyond Gartman’s ken, it didn’t humble him
enough to beg off the game of predicting where the stock market is
heading. At least he hasn’t met the fate that Dante reserved for
soothsayers in his classic 14th century work, The Divine Comedy: Those who attempt to divine the future should have their heads twisted around and be forced to walk backwards for eternity.

But
it would be wrong to just pick on Gartman. He is just one of a long
list of market pundits who attempt to do what many respected investment
minds argue is impossible—predict with some degree of confidence where
stocks as a whole are heading and then often recommend a sharp shift in
one’s asset allocation to play a bull or bear scenario....MORE

I've no idea where he was going with "I’ve only been at this for
40-some years, so I’m relatively new to it."

We have very little patience with guys like Gartman.
Here's the "since inception" chart for the Horizons Gartman ETF:

You'll note the ETF underperformed the S&P 500 from day 1 and only got worse from there.
In June 2009 we had:
Last week MarketBeat had a post "Gartman: ‘Warren Buffett Is an Idiot’" that relayed Mr. Gartman's radio comment. I had a comment [of course you did -ed] as did 57 other MarketBeat readers. The post is still at the top of their most read list. 10:47 am June 19, 2009

Climateer wrote:

Mr. Gartman is a lightweight.
As donzoab points out, free cash flow is key. It allows you to play in the big leagues.
That and being able to cut opportunistic deals with a single phone call to Charlie or Sokol.
When
Gartman takes Goldman as deep as Warren did, 10% money and warrents!
(in the money $1.1 Bil.) I’ll pay attention to his comments on BRK.

On June 18, 2009 Dennis Gartman said "Warren Buffett is an idiot"* and
announced to the world that he was short Berkshire Hathaway. Neither of
these were very smart moves. As the chart below shows, Berkshire is up
40-odd percent since Gartman's call.
In fact BRK.b has outperformed the S&P 2:1 in the intervening months....

Long time readers know that I've had some quibbles with Mr. Gartman (Dennis Gartman is an Idiot (BRK.B; DXY) regarding his understanding of Berkshire Hathaway and it's chairman.
(See links and chart after the jump)

Then there was his EUR/USD commentary. June 1 with the Euro at 1.22 he said it was "almost certainly" going under $1.20. Duh
We'd been making the same call since Nov. 2009 at $1.50.
The buck strengthened to $1.1877 and reversed, I think it was June 4.
On June 18 of this year he called the Euro doomed. That may be but it
had bottomed two weeks earlier and was on its way to kicking Yankee
butt.
Hmmm...

On the other hand he is a student of the grains. Here's FT Alphaville...

...“The investment objective of the Horizons AlphaPro Gartman ETF (the
“ETF”) is to provide investors with the opportunity for capital
appreciation through exposure to the investment strategies of The
Gartman Letter, L.C. (“Gartman”), founded by Dennis Gartman….”

The fund launched at the beginning of the big bull run in March,
2009, at $10.00 It’s at $8.56, down 14.4% since the launch. The S&P
500 is up 71.5%. This baby is one anti-correlated asset. The Gartman
fund has recently begun to turn up which probably means there is an
asteroid headed our way.”...

And now this, via the Chicago Tribune:
CAPE CANAVERAL, Fla (Reuters) - A huge asteroid will pass closer to
Earth than the moon Tuesday, giving scientists a rare chance for study
without having to go through the time and expense of launching a probe,
officials said....

Europe depends on Russian oil and gas exports, so an embargo may not be practical. But there is another way to apply pressure

Russia
is vulnerable to sanctions. Economic weakness caused the collapse of
the Soviet Union a quarter of a century ago and – the self-enrichment of
the oligarchs apart – not much has changed since. Energy exports to the
rest of the world pay for imports of machines and consumer goods. The
population is ageing and there has been little industrial
diversification.

So, if the west really wants to hurt Vladimir Putin it should slap an
oil embargo on Russia similar to that used against Iran. A drop in oil
exports would mean Russia would not be able to afford German cars,
French wine and Italian designer clothes.

It's not quite that simple. Europe
is dependent on Russia for its energy supplies, so an embargo might be a
classic example of shooting oneself in the foot, especially if Russia
finds a way of sending its oil and gas east to energy-hungry China.

This, though, could not happen overnight, so what the west really
needs is a way of hurting Putin that does not hurt itself. Neil Barnett
of the Centre for Policy Studies says there is a way of doing this:
persuade Saudi Arabia to do the dirty work.

There is a precedent. Angered by the Soviet invasion of Afghanistan in
1979, the Saudis turned on the oil taps, driving down the global price
of crude until it reached $20 a barrel (in today's prices) in the
mid-1980s. It would take a much smaller drop in the cost of oil – from
$107 a barrel currently to somewhere south of $90 a barrel – to cause
Russia severe financial and economic damage....MORE

It has been a busy week for Caravaggio experts. A long-simmering
court case involving the Card Sharps, above, is finally reaching court
in London just as a connoisseur is claiming to have found the true
original to the painters Mary Magdalene in Ecstasy, according to The
Guardian:

Mina Gregori, 90, president of the Roberto Longhi
foundation of art history studies in Florence and author of several
books on the baroque painter, said she was 100% sure she had found the
original Mary Magdalene in Ecstasy.

“I have become a connoisseur,” she said. “And I know a Caravaggio when I see one.”

A number of elements had combined to give her complete certainty, she
said, that the oil on canvas she was presented with this year was the
real thing.

There are several different versions of the Mary Magdalene in
Ecstasy, and until now the one thought most likely by art historians to
be the 1606 original was lying in a private collection in Rome....

Matt Taibbi, the star magazine writer hired earlier this year
to start a satirical website for billionaire Pierre Omidyar's First
Look Media, is on a leave of absence from the company after
disagreements with higher-ups inside Omidyar's organization, a source
close to First Look confirmed today.

Taibbi's abrupt disappearance from the company's Fifth Avenue
headquarters has cast doubt on the fate of his highly anticipated
digital publication, reportedly to be called Racket, which First Look executives had previously said would launch sometime this autumn.

When he was hired, amid much fanfare, Taibbi's website was meant to
be the second in an envisioned fleet of titles to be published by First
Look, an ambitious digital journalism company funded by Omidyar, the
founder of eBay and one of the richest tech moguls in America. Like its
counterpart the Intercept, launched earlier this year by Glenn Greenwald
and others to pursue investigations of NSA surveillance and the
intelligence world, it was a venture centered around a brand-name
polemicist without much management experience. Prior to joining First
Look, Taibbi made his name by gleefully skewering fat targets for Rolling Stone — most famously, he described
Goldman Sachs as "a great vampire squid wrapped around the face of
humanity" — and he said at the time of his departure that he was lured
away by the chance to lampoon the financial industry in the
"simultaneously funny and satirical voice" associated with the legendary
magazine Spy. Over the succeeding months, the mission of the
publication broadened to encompass political satire as well, and it
brought on a number of high-profile names from the New York digital
scene, includingdeputy editor Alex Pareene, formerly of Salon; Laura Dawn, a digital video producer who formerly worked with Moveon.org; and Edith Zimmerman, founding editor of the Hairpin.

"Journalists should be dark, funny, mean people," Taibbi told New York in an interview in March. "It's appropriate for their antagonistic, adversarial role."...MORE